Canadians use their Tax-Free Savings Accounts (TFSA) to build retirement wealth. However, in a situation like today where inflation could peak to above 6%, the TFSA is also the best tool to create passive income. Unlike the Registered Retirement Savings Plan (RRSP), TFSA withdrawals are tax-free.
Users can earn specific amounts within their TFSAs to cope with rising inflation. Assuming your target is to earn $500 in tax-free passive income every month, there’s a way to achieve it. Follow a simple formula and adjust if necessary.
Simple formula
Since dividend stocks are the preferred assets in a TFSA, multiply $500 by 12 months. The product $6,000 represents the annual dividend amount. If you choose companies that pay at least a 4% dividend, divide $6,000 by .04. The quotient, or $150,000, is the amount you would need to generate $500 in TFSA passive income per month.
You can be flexible and invest in stocks that pay higher than 4%. Follow the same computation and note that as the yield goes up, the required investment amount is smaller. Hence, you would need $120,000 or $100,000 if the selected investment pays 5% or 6% dividends.
Growing dividends
Emera (TSX: EMA) is recession-resistant and a reliable passive income provider. The $15.89 billion energy and services company generates revenue from regulated assets (electricity generation, electricity and gas transmission as well as distribution). Thus, regardless of the economic environment, business will proceed.
In 2021, Emera’s adjusted net income reached $723 million, or an 8.7% increase versus 2020. According to its president and CEO, Scott Balfour, the strength of the business and management’s strategy will continue to drive value and growth through various investments.
Under its capital investment plan from 2022 to 2024, Emera is prepared to spend $8.4 billion to grow its rate base by 7% to 8% through 2024. The good news to TFSA investors is that management also plans an annual dividend growth of 4% to 5% within the same period.
If you invest today, the utility stock trades at $60.51 per share and pays an attractive 4.38%. Anyone with $136,986.30 worth of Emera shares earns $500 every month.
Resilient REIT
Slate Grocer (TSX: SGR.U) in the real estate sector is a recession-proof, given the resilient nature of its business. This $981.85 million real estate investment trust (REIT) owns and operates grocery-anchored real estate in the United States. In Q4 2021, rental revenue and net operating income (NOI) increased 20.3% and 41.2% versus Q4 2020.
According to management, Slate Grocer is well-positioned to pursue organic growth and high-quality, accretive acquisitions. Blair Welch, Slate Grocer’s CEO, said, “We have significantly accelerated the REIT’s growth and enhanced the overall stability and durability of our portfolio.”
Welch adds that the mission is unchanged. Slate Grocer will own and operate a superior portfolio of grocery-anchored assets that provides long-term sustainable income.
As of March 25, 2022, this real estate stock trades at $16.58 per share. Current investors enjoy a 45.44% year-to-date gain on top of the 6.73% dividend. Try computing the amount required to produce $500 every month using the formula above.
Comply with TFSA rules
The formula above should help TFSA investors determine investment amounts for desired passive income amounts. However, users must comply with the TFSA rules and not go beyond the annual limits or available contribution rules.
